Company cars remain one of the most tax-efficient ways to drive a desirable vehicle in the UK, but the rules around company car tax — officially called Benefit in Kind (BiK) tax — are complex and change regularly. In 2026, this guide covers everything employees and employers need to know about company car tax.

What Is Benefit in Kind Tax?

When you are provided with a company car — rather than a car allowance or cash — the car is considered a benefit provided by your employer. HMRC taxes this benefit as a Benefit in Kind, which is added to your annual income for income tax purposes. The amount of BiK tax you pay depends on:

  • The car's list price (the P11D value)
  • The car's CO2 emissions
  • Your marginal income tax rate

Understanding P11D Values

The P11D value is the list price of the car including VAT and delivery charges, but excluding the first registration fee and road tax. It does not reflect the actual price your employer paid for the car — it is a notional value used for tax calculation. Options and accessories are included in the P11D value at their full list price.

For a BMW 320d M Sport with a list price of GBP 45,000 and options totalling GBP 5,000, the P11D value is GBP 50,000. This GBP 50,000 figure is used to calculate the annual BiK tax charge.

BiK Rates for 2026

HMRC sets BiK rates based on the car's CO2 emissions. The lower the emissions, the lower the BiK rate. For 2026:

  • Electric vehicles (0g/km): 2 percent BiK rate
  • Plug-in hybrids under 50g/km: 2 percent BiK rate
  • Plug-in hybrids 50-75g/km: 5 percent BiK rate
  • Petrol/diesel hybrids over 75g/km: 12-19 percent depending on exact CO2
  • Standard petrol/diesel cars: 19-37 percent BiK rate

These rates are set by HMRC and typically increase by 1 percentage point per year for most vehicles, but the government has committed to keeping the electric vehicle rate at 2 percent through to 2028.

How to Calculate Company Car Tax

The annual BiK tax charge is calculated as follows:

Step 1: P11D value multiplied by the BiK rate = the BiK value

Step 2: BiK value multiplied by your marginal income tax rate = annual BiK tax

Example: BMW 320d M Sport with P11D of GBP 50,000 and CO2 of 135g/km

  • BiK rate for 135g/km petrol car: 25 percent
  • BiK value: GBP 50,000 x 25% = GBP 12,500
  • Basic rate taxpayer (20%): GBP 12,500 x 20% = GBP 2,500 per year
  • Higher rate taxpayer (40%): GBP 12,500 x 40% = GBP 5,000 per year
  • Additional rate taxpayer (45%): GBP 12,500 x 45% = GBP 5,625 per year

Same Car — Electric vs Petrol Comparison

Consider the same BMW model — now available as a fully electric i3:

  • i3 with P11D of GBP 40,000 and 0g/km CO2: BiK rate 2 percent
  • BiK value: GBP 40,000 x 2% = GBP 800
  • Basic rate taxpayer: GBP 800 x 20% = GBP 160 per year
  • Higher rate taxpayer: GBP 800 x 40% = GBP 320 per year
  • Additional rate taxpayer: GBP 800 x 45% = GBP 360 per year

The annual tax saving from choosing an electric company car over the equivalent petrol model is GBP 2,340 for a higher rate taxpayer — or GBP 14,040 over a typical 3-year company car cycle.

Salary Sacrifice and the HMRC Advisory Fuel Rates

Many company car schemes operate through salary sacrifice, where the employee sacrifices part of their salary in exchange for the company car. The HMRC scheme allows employers to set sacrifice amounts that benefit from National Insurance savings. Always seek advice from a tax specialist when setting up salary sacrifice arrangements.

Advisory Fuel Rates for Company Cars

If your company car scheme allows you to use the car for private mileage, your employer may reimburse you at HMRC's Advisory Fuel Rates. These rates — updated quarterly — reflect the actual fuel cost per mile for different engine types and fuel sizes. In 2026, rates are approximately:

  • Petrol (1,400cc and under): 13p per mile
  • Petrol (over 1,400cc): 16p per mile
  • Diesel (1,600cc and under): 13p per mile
  • Diesel (over 1,600cc): 16p per mile
  • Electric: 9p per mile (based on the electricity cost equivalent)

Zero-Emission Mileage Supplement

From April 2025, drivers of zero-emission company cars who receive a mileage reimbursement from their employer can receive 4p per mile from the employer tax-free, in addition to the 9p per mile Advisory Electric Vehicle Rate. This provides a combined reimbursement of 13p per mile — the same as petrol — making employer-reimbursed EV mileage more financially neutral.

Employer Responsibilities

Employers are responsible for:

  • Calculating the P11D value for each company car
  • Reporting the benefit to HMRC via P11D forms
  • Paying Class 1A National Insurance on the BiK value
  • Operating PAYE on BiK tax through payroll
  • Updating HMRC when the car changes or the BiK rate changes